BlackRock Opposes Pepsi-Mondelez Merger Proposed By Nelson Peltz

BlackRock, Inc. (NYSE:BLK), the largest investment management firm worldwide, expressed its opposition regarding a proposal from Nelson Peltz, founding partner of Trian Fund Management LP for PepsiCo, Inc. (NYSE:PEP), to buy Mondelez International Inc (NASDAQ:MDLZ) and to spin off its under-performing beverage business.

BlackRock CEO Larry Fink comments

The report fromReuters quoted Larry Fink, chief executive officer of BlackRock, Inc. (NYSE:BLK), who expressed his sentiments regarding Peltz’ proposal during an interview with CNBC. BlackRock CEO Larry Fink said, “At the moment, I would disagree with him. I question how it would add long-term value.” BlackRock owns a 5% stake in PepsiCo, Inc. (NYSE:PEP).

Last Wednesday, Peltz, who owns less than a 1% stake (approximately $1.3 billion) in PepsiCo, Inc. (NYSE:PEP), suggested that the company should acquire Mondelez International Inc (NASDAQ:MDLZ) for approximately $62 billion to create a “global snack power house” and to divest its beverage business globally.

PepsiCo maintains its position

However, management of PepsiCo, Inc. (NYSE:PEP) repeatedly maintains its position that splitting the global beverage business is not necessary. According to Henry Smith, chief investment officer at Haverford Quality Investing, Peltz needs to convince the large institutional shareholders of the beverage maker to support his proposal. Pepsi might be forced to carry out one of Peltz’ proposals, if he gets their support.

Smith opined that Peltz might succeed in that effort because 37 of the 40 top shareholders of PepsiCo, Inc. (NYSE:PEP) also own a stake in Mondelez International Inc (NASDAQ:MDLZ). However, Smith said, “That’s not going to happen in the next few months. That’s a multiple-quarter time frame.”

WP Stewart chief investment officer James Tierney commented, “Not that many people on the buy side really believe that there’s a ton here. Many on the sell side would love to be involved in such a transaction, but not that many believe it’s going to happen.”

JPMorgan analysts show confidence in PepsiCo

On the other hand, JPMorgan analyst John Faucher opined that the market may have little confidence in the ability of PepsiCo, Inc. (NYSE:PEP) to implement a large transaction at present. He said, “With neither company operating at full speed at this point, we think adding in massive integration would only exacerbate their problems.” He also expressed doubts on any transaction that includes store delivery networks because disruptions will harm sales.

Meanwhile, analysts at Bernstein Research said that they suggested a transaction similar to Peltz’ proposal for a merger of PepsiCo and Mondelez, although the research firm said its view is slightly different and more conservative.

In a note to investors, Bernstein Research analysts wrote, “We assume that in an all-stock, tax free Reverse Morris Trust (RMT), PepsiCo would merge with Mondelez at current share price in 1:1 ratio with debt/EBITDA of 4.6x (similar to Peltz proposed leverage) and spin out BeverageCo. Our base case synergies were lower than Peltz’ assumptions with potential revenue synergies of $2-$3 billion with 15% flow through (versus Peltz’ $3 billion at 25%) and cost synergies of roughly $2 billion (versus Peltz’ proposed $3-4 billion).”

PepsiCo, Inc. (NYSE:PEP) recently restructured its business operations. The beverage maker cut 8,700 jobs last year to save $1.5 billion in costs, implemented shares buyback, and is depending on international expansion, new products, and promotional campaigns to boost its profits and to enhance shareholder value over the long-term.